Author Topic: A chance to own a 5 appartment building through family; looking for optimal ways  (Read 886 times)

Yorgh

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Hello!

First post here as I used to never be able to activate my account. Been a reader/follower for years and love the community. I hope you guys can help me figure out a situation. I will try to make it as short as possible.

Gf's dad owns a building in montreal, quebec, canada. 3 stories high, 5 appartments. We currently rent the ground level appartment which takes the whole level. Floors 2 and 3 each contain 2 smaller appartments. Her dad needs money mainly because he didn't manage his money well, lost his job long time ago, went through depression and never worked again. He moved out of our current appartment to go live on the 3rd floor in a smaller one. He did that to increase his rent revenue and to help us out with the brand new mini-mustachian we got. So keep in mind, he's broke but wants to help us out.

The building:
bought for 160k 30 years ago. 
Still 90k remaining on mortgage (crazy I know).
Worth 700k atm.
Small appartments bring in around 600-650$ a month of rent. We give him 1050 but its prob worth 1300/month. 
Needs a lot of work and love. We talking about walls, roof, isolation, etc. But IT IS a very nice building, just wasn't taken care of in the right way.
In a very nice neighbourhood filled with young families, parcs, buses, subway station, etc. No real need of a car and nice schools around. This means he could sell the thing extremely easily. But he loves the place because the basement (below us) is a huge refurbishing working space where he works and we love it too.

The situation:
He wants to clear the mortgage and his depts as he is about to turn 65. He managed his cash poorly at some point so he has the 90k mortgage plus about 80k in debt. He used to repair every little thing in the building but his body is getting old.

He first thought of selling us the ground level appartment for 200k (prob worth close to 350k imo) to clear his debt and get us a good start in life with our family. He is now a bit worried and thinks more and more that he would like to sell the whole thing and enjoy the rest of his life (the dude lived on 9k/year forever and now would like to travel a bit, buy good clothes, eat well, etc.)

My thoughts are the following, as that's where I'm thinking I haven't found the optimal way :
If he sells the whole thing to us for like 550-600 (he would sell it cheaper to help us out), we will be able to manage the mortgage and use the rents, etc. But I don't think he needs to sit on 300-400k in his bank at his age and knowing his lifestyle. I find it crazy to clear his super low mortgage by having us build a big one. I am trying to find a way to clear his debt, have him have enough cash (he has zero RRSP or TFSA but he will touch the "old people pension" at 65, which is low) to enjoy his life with "luxury" and have us save a lot of money.

Basicaly I'm thinking we could use our money on him instead of using it on damn interest to a bank. Is it through buying him the whole building for a cheaper price and then having him load up on RRSPs? Is it by buying the place at cheaper price and paying him to be the maintenance guy (aka just giving him some money every month) and not charging rent? Should we buy the ground level for more and have him give the building to her when he dies (his health is fine atm)?

I really feel there has to be a way to profit on his low 90k mortgage to own a 700k building and then use some credit line to do all the improvements needed (we talking a lot of money) to the building to keep it up and increase its worth (would prob reach around 900k if all is fixed). Plus montreal has not faced a price bubble like toronto or vancouver, prices are actually super low here so I am not too worried.

Our situation:
We got prob around 50k for a cashdown atm, but it's been increasing really quick thanks to the community. We bring in around 115k a year atm in salaries but I am about to increase my salary but quite a lot and would bring that to like 140k.

Hope I put all the necessary details. Thanks for your help!



mozar

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Instead of doing something super complicated he should sell the house at market and if he still wants to help you he can give you a cash gift.

seattlecyclone

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Instead of doing something super complicated he should sell the house at market and if he still wants to help you he can give you a cash gift.

Agreed. If you don't actually want to own this building, ask him to find another buyer at market rates.

Mrs.Piano

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Is he interested in selling the whole thing to you and taking back a mortgage himself?Then he can get mortgage payments from you every month?

beekayworld

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I am not familiar with Canadian taxes, but would he have Long Term Capital Gains tax on the sale? In the U.S. having bought the building for 160k and selling it for 700k would result in LTCG tax of about 81k (if he's in the 15% LTCG tax bracket. In the U.S. that means making 38k to 426k if he's single).

If he leaves the building to your GF when he passes away, the cost-basis steps up to the value on the date he died. So for 2018 the cost-basis would be 700k and then whenever she sells it, the amount of the sales price above 700k would be taxed as LTCG.

81k is a lot to pay in extra taxes!

(In the U.S. you wouldn't pay LTCG on your primary residence if you gain less than 250k single, 500k married.  Possibly he wouldn't have to pay LTCG on the portion of the building which he used as his primary residence.  I would think the basement portion has some value he could add in).

As for him selling your GF the building for far below market value, that's tricky. The IRS keeps a close eye on transactions between relatives.  I suspect Canada also could consider the difference a gift. Is there a gift tax in Canada?

Yorgh

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After seeking financial advice from a friend in that field, it would indeed be a bad move for him to sell cheap because of taxes and laws. The best solution appears to have him sell to us for full price, but only ask for us to pay his mortgage+debst+taxes (80k was right btw)+ some safety amount and then sign that we will slowly reimburse the rest through monthly payments. He then puts on his will that upon his death, the remaining of the cash we would owe him goes to his daughter aka it gets erased.

This way we buy a 700k building for around 300k and give him some interest free payments every month (like some more mortgage payment but won't be as big and interest free). The nice part is since this will already have been taxed through the sell (hes taxed for the whole 700k) his annual revenu will be 0 so he will get the max pension amount possible and get all the special grants (which should total around 1500$/month). That combined with an amount we will give him should allow him for a decent lifestyle and get us a good investment.

Mrs.Piano

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Glad to hear that y’all found a workable solution!